In the draft Revenue Laws Second Amendment Bill, 2008 there is a seemingly small change to paragraph 20(1) of the fourth schedule to the Income Tax Act.

This paragraph deals with the second provisional tax payment due for rendition by all provisional taxpayers.

Up to now, there was no penalty payable as long as the estimated taxable income in respect of the year then ending is not less than 90% of the amount of the actual taxable income for the period in respect of which the estimate was made and was also not less than the “basic amount” which is the taxable income as disclosed in the latest tax assessment issued to that taxpayer.

In practice, the effect was that the second provisional tax payment could be based with impunity on the taxable income as disclosed in the latest assessment issued by SARS. If a taxpayer considered that the actual taxable income for that year would probably be less than the last assessed amount, a lower estimate could be made. If however that estimate was lower than 90% of the taxable income as ultimately assessed for that year, a penalty tax of 20% was payable. The penalty was calculated on the difference between the amount of the normal tax on the estimated taxable income and the amount of normal tax calculated on 90% of the actual taxable income. In addition to the penalty, interest was also payable at the current (non-tax deductible) rate of 14% p.a.

The proposal was to delete reference to the “basic amount”, being the taxable income as reflected in the latest tax assessment issued by SARS.

The effect was to be that all provisional taxpayers must make a careful estimate of their taxable income for the second provisional tax return i.e. the return due for lodgement and payment before the last day of the tax year.

If the normal tax on the estimated taxable income is less than 90% of the normal tax as finally assessed for that year, the aforementioned 20% penalty tax will be payable on the difference between the two amounts of normal tax referred to. After representations, we understand that SARS has since agreed to reduce the 90% to 80%.

In many cases, provisional taxpayers will be very hard-pressed to estimate their taxable income for a year before the end of that year. Trading stock is still to be counted and valued, not all expense vouchers and creditors statements will have been received, the final sales for the last month could not yet have been calculated, etc, etc. There are truly so many variables at that stage that very few taxpayers will be able to accurately determine their taxable income before the year end.

Although we understand that the penalty will only be applied by SARS where the taxpayer can not show that due care and responsibility was taken in calculating the provisional payment, this onus of proof will not always be easy to discharge. It is not yet clear whether these changes will be passed into law without further amendment. If so, the effect will be startling with many taxpayers falling into the penalty net.